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11 January 2008

Car sales defy economic gloom

Autocar's Hilton Holloway kicks off's look

By Hilton Holloway

Conventional wisdom insists the whole of the UK has been on a decade-long spending spree, exploiting the equity that grew from rocketing house prices and running up record levels of debt.

And with the figures now coming in from the high street, it’s clear that a major ‘softening’ in consumer activity is already with us.

This would suggest the new car market should also be wilting dramatically. After all, a new car is the second most expensive purchase most people will make and certainly the most expensive consumer durable.

However, year-end figures from the Society of Motor manufacturers and Traders show that new car sales went up by 2.5 percent in 2007 hitting a total of 2.4m. Indeed, it has been the strongest year for carmakers since 2004. The SMMT expects that 2008 will see a small slowdown, but sales should still hit 2.34m.

So why, even with the economy stumbling, can such ‘big ticket’ purchases hold up so well? Primarily, new car sales are split roughly 55 per cent business and 45 per cent private. So good sales reflect a healthy business sector.

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But there are plenty of good reasons for private individuals to go out and buy a new car. Firstly, nothing tempts like an all-new model and new car introductions have reached a relentless pace.

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This is because manufacturers are spinning more and more new vehicles using the same basic chassis and components.

This year, for example, the Ford family launched the new Mondeo, the new (UK-built) Land Rover Freelander and a new sporty seven-seat people carrier called the Ford S-Max.

All three have flown out of the showrooms and with good reason. The Mondeo and Freelander and big improvements on the models they replace. And the S-Max is a new twist on the boring old MPV that has proved to be a smash hit.

The upshot is that Ford can launch three new and much improved models to attract buyers and do it with much-reduced development costs because the vehicles have much in common under the skin.

These new-generation cars also have the advantage of ever-greater levels of crash safety, another compelling reason for drivers to write a cheque. And that cheque is unlikely to be for the list price. Downward pressure on showroom prices can be significant.

Rising fuel costs and running costs (especially insurance premiums) also play a part in pushing demand for new vehicles. For example the Ford Focus, the UK’s best-selling car in 2007, is a medium size hatchback, but it offers the kind of refinement and safety only available in bigger cars five or six year ago. So it can pay dividends to downsize.

The same applies to superminis (such as the new Vauxhall Corsa) a market segment that continues to boom. Similar significant engineering improvements mean here too it makes financial sense to downsize from a medium-size hatch.

Perhaps the biggest reason for trading in an older car is the significant fuel savings that can be extracted by switching to a diesel engine. Diesel-powered cars now account for 44 percent of the new car market, up from just 23 percent or so at the turn of the century.

And why not? Typically, a 1.6-litre diesel Focus could return 60mpg on a long journey. An equivalent 1.6-litre petrol engine Focus will manage just 42mpg.

But it’s probably worth noting the recent comments of Stuart Rose, chairman of Marks and Spencer. He said he had never seen a UK economy so polarised.

And it’s the older middle classes who have the quiet financial clout – and will – to go out and spend.

Their natural habitats – John Lewis, Waitrose and M&S food stores – are on the up. And they are also a significant force driving private new car sales.